How to Manage Unexpected Retirement Expenses

What is the true cost of retirement and what are the driving forces behind unexpected and expected retirement expenses?

Whether you plan to globetrot or enjoy life at home in retirement, your main goal is likely not running out of money. In order to live the life you hope with the income you have, consider developing a budget that accounts for planned and unplanned retirement expenses.

Over time, how we spend money changes, so as you develop your plan it is important to assess what costs may go up, what costs may go down (or away), and what factors are driving these costs. Many retirees can expect to spend less in certain areas. For example, in retirement the costs associated with commuting diminishes and the demand for multiple cars and/or high-end cars may lessen.

However, those newfound savings can be offset by unexpected costs that come with retirement life. As we enjoy longer, healthier retirements, it becomes more and more difficult to budget for one-time travel plans. From a grandchild’s graduation to a long-time friend’s wedding anniversary, there will be unexpected adventures you do not want to miss.

Retirement Expense Solutions

Retirement planning would be easier without surprises. While we cannot anticipate every unexpected retirement expense, we can prepare for them. As your plan develops, establish retirement income solutions that help you manage unanticipated line items, such as:

  • Establish Guaranteed Income Stream
  • Protect Hard-Earned Savings
  • Secure Safe-Money Reserve Access
  • Create Legacy Plan 

To demonstrate where these solutions can benefit your retirement, below we highlight five common types of real life retirement expenses. Included are the average annual spending amounts for retirees and the average inheritance figures, according to the US Bureau of Labor Statistics and an HSBC retirement study. In each instance, we outline examples of expected and unexpected cost factors to consider as you prepare for your retirement future.

Everyone’s retirement priorities and lifestyles differ. By starting with universal demands like savings protection, a guaranteed revenue stream and flexible income, anyone can develop the foundation of a retirement spending plan that accounts for what may lie ahead.

The true costs of retirement will never be totally fixed, but there are ways to make unexpected costs less stressful. As you plan your own retirement, focus less on what could happen and more on what strategies can be put in place for whatever happens.

Sources:
American Equity Investment Life Insurance Company
US Bureau of Labor Statistics, “Consumer Expenditures Study,” by Age. 2015
HSBC, “The Future of Retirement,” Study. 2015

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IRS Confirms Tax Filing Season to Begin January 28

WASHINGTON ― Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled.

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig.

Congress directed the payment of all tax refunds through a permanent, indefinite appropriation (31 U.S.C. 1324), and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the IRS filing season will be included in an updated FY2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days.

“IRS employees have been hard at work over the past year to implement the biggest tax law changes the nation has seen in more than 30 years,” said Rettig.

As in past years, the IRS will begin accepting and processing individual tax returns once the filing season begins. For taxpayers who usually file early in the year and have all of the needed documentation, there is no need to wait to file. They should file when they are ready to submit a complete and accurate tax return.

The filing deadline to submit 2018 tax returns is Monday, April 15, 2019 for most taxpayers.  Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.

Software companies and tax professionals will be accepting and preparing tax returns before Jan. 28 and then will submit the returns when the IRS systems open later this month. The IRS strongly encourages people to file their tax returns electronically to minimize errors and for faster refunds.

Tax Refunds Will Be Paid During Shutdown, White House Says

New policy meant to ‘mitigate the impact’ of shutdown, Vice President Mike Pence says

The IRS will pay tax refunds even though the agency is subject to the federal government shutdown, after the Trump administration reversed a longstanding policy.

The decision, announced Monday by the White House Office of Management and Budget, would remove one of the biggest potential pains for Americans from the shutdown and allow hundreds of billions of dollars to flow once tax filing opens later this month in the event that the shutdown lasts that long.

The administration is trying to make the shutdown as “painless as possible consistent with the law,” Russell Vought, the acting OMB director, told reporters.

“We’re going to continue to take steps like that to mitigate the impact,” Vice President Mike Pence said of the tax refunds.

Until Monday, the Trump administration and its predecessors had said refunds couldn’t be paid while the IRS was shut because that wasn’t necessary to protect life or government property.


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Happy Holidays From NFS!

Happy Holidays From NFS!

Your friends at Northeast Financial Strategies want you to know how much your loyalty and friendship are appreciated this year and in all years past. At the holiday season, our thoughts turn gratefully to those who have made our success possible. It is in this spirit we say … thank you and best wishes for the holidays and a happy new year.

From all of us here at NFS, THANKS!!

Year-End Tax Planning for Individuals

Once again, tax planning for the year ahead presents a number of challenges, this year, primarily due to tax laws changes brought about the passage of the Tax Cuts and Jobs Act of 2018. These changes include the nearly doubling of the standard deduction, elimination of personal exemptions, and numerous itemized deductions reduced or eliminated. Let’s take a closer look.

General Tax Planning

General tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following:
  • Selling any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
  • If you anticipate an increase in taxable income this year, in 2018, and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2019 tax return in 2020. Don’t hesitate to call the office if you have any questions about this.
  • Prepaying deductible expenses this year using a credit card. Examples of deductible expenses include charitable contributions and medical expenses. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid. Likewise with checks. For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2018 tax return.
  • If your company grants stock options, then you may want to exercise the option or sell stock acquired by exercise of an option this year. Use this strategy if you think your tax bracket will be higher in 2019. Generally, exercising this option is a taxable event; sale of the stock is almost always a taxable event.
  • If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.

Accelerating Income

If you anticipate being in a higher tax bracket next year, accelerating income into 2018 is a good idea, especially for taxpayers whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).


In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2018, depending on your situation. Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax credits, higher education tax credits, and deductions for student loan interest are examples of these types of tax benefits.

Examples of other strategies a taxpayer might take include:
  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2019, by year-end. This does not apply to mortgage escrow accounts.
  • Pay 2019 tuition in 2018 to take full advantage of the American Opportunity Tax Credit, an above-the-line credit worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
  • Try to bunch medical expenses. For example, you might pay medical bills in whichever year they would do you the most tax good. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). For example, to deduct medical and dental expenses these amounts must exceed 7.5 percent of AGI. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. Note: The 7.5 percent threshold is only in effect for tax years 2017 and 2018. In 2019, it reverts to 10 percent AGI.

Additional Medicare Tax


Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2018 tax return next April.

High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.

If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).

Net Investment Income Tax (NIIT)


The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.

Please call if you need assistance with any of your long-term tax planning goals.


New Tax Rate Structure for the Kiddie Tax


Under the TCJA, the kiddie tax rules have changed. For tax years 2018 through 2025, unearned income exceeding $2,100 is taxed at the rates paid by trusts and estates. For ordinary income (amounts over $12,501), the maximum rate is 37 percent. For long-term capital gains and qualified dividends, the maximum rate is 20 percent.


Other Year-End Moves


Maximize Retirement Plan Contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,500 for 2018), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don’t apply.

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.

Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.

In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the amount of excess over 7.5 percent of AGI). For amounts withdrawn at age 65 or later that are not used for medical bills, the HSA functions much like an IRA.

To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2018, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,350 for single coverage or $2,700 for a family.

529 Education Plans. Maximize contributions to 529 plans, which starting in 2018, can be used for elementary and secondary school tuition as well as college or vocational school.


Summary


These are just a few of the steps you might take. Please contact the office for assistance with implementing these and other year-end planning strategies that might be suitable for your particular situation.

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